With the bulk of the FAAMG stocks – which is now GAMMA following Facebook’s rebranding to Meta (at least until the company  quietly changes its name back now that the whole Metaverse farce has blown up in its Metaface) – having reported Q3 results (which have uniformly been a disaster, sending megatech stocks tumbling), investors were keenly looking to Amazon and Apple earnings after the close today, to round out the picture for the (former?) market generals and set the tone for the rest of 2022, or at least until after the midterms when the BLS reports that real payrolls were actually -1,000,000, and also to conclude whether the ongoing Nasdaq implosion has been justified.

Focusing on Amazon, investors are expecting Amazon to outperform digital advertising peers Facebook and Google through an ad slump. The theory, as Bloomberg notes, is Amazon is closer to the customer at the time they are prepared to buy something, so that advertising is more valuable when consumers are penny-pinching when compared to broader marketing campaigns aimed at awareness on social-media sites like Instagram or Google’s search engine where users aren’t necessarily shopping.

Investors also expect a slight slowdown in Amazon Web Services sales growth (thank you Microsoft and Google), with third-quarter revenues expected to come in at $21 billion, up 30% from a year earlier. Cloud-industry peer Microsoft reported earlier this week that rising energy prices cut into cloud computing profits, so there will likely be some focus on Amazon’s cloud profit margins as well to see if they are under similar pressure. Investors expect operating income of $6.1 billion in the third quarter from Amazon’s cloud business.

Poonam Goyal, senior retail industry analyst for Bloomberg Intelligence, and Anurag Rana, BI’s senior software analyst, point to Microsoft’s projection of a slowdown as a harbinger for AWS. “Amazon Web Services’ sales growth in constant currency could dip in 4Q to about 26%-27% from consensus of 29%,” they wrote in a recent note. “The slump is probably going to stretch through 2023, with recovery possible in 2024.”

Amazon’s employee count will also be an interesting metric to watch. The company has been busy cutting some experimental projects, which would reduce its numbers, but it also announced plans to hire 150,000 people for the holidays, which is the same as last year. As of June 30, Amazon had 1.52 million employees globally. If that figure goes down, it will be the first time Amazon has reduced its number of employees for two consecutive quarters since 2001 and gives a clearer picture of how deep the cuts have been.

But while Q3 earnings will matter, all eyes will likely be on the forecast for the busy holiday quarter. Investors expect earnings of 39 cents per share on sales of $156 billion. Investors are counting on Amazon to boost profits and sales while trimming costs through hiring freezes and cutting experimental projects.

That said, like the rest of the tech sector, rising labor and energy costs coupled with slower spending growth have put a strain on Amazon’s business model. Amazon CEO Andy Jassy has taken several steps this year to boost revenues, including increasing the price of Prime membership and tacking new fees on merchants selling goods on the web store. Investors want to see if Amazon can maintain that strong connection with Prime subscribers and win their spending during the holidays, or if more expensive Prime membership compels them to shop elsewhere.

Heading into earning, Amazon shares suffered steep declines, falling as much as 5.1%. The e-commerce giant’s shares are down 8.5% over the past two days, the worst two-day slump since June.

So with all that in mind moments ago AMZN just reported Q3 results which were an absolute disaster and nailed the coffin of the FAAMGs shut, because not only did Amzn miss sales, and report disappointing AQS metrics but its forecast was a disaster.

• EPS 28c, beating estimates 22c
• With all that in mind, moments ago AMZN just reported Q3 results and they were an absolute disaster.
• Net sales $127.10 billion, +15% y/y, missing estimate $127.64 billion
  • Physical Stores net sales $4.69 billion, +10% y/y, beating estimate $4.68 billion
  • Online stores net sales $53.49 billion, +7.1% y/y, missing estimates $54 billion
  • Third-Party Seller Services net sales $28.67 billion, +18% y/y, beating estimates $28.49 billion
  • Subscription Services net sales $8.90 billion, +9.3% y/y, missing estimate $9.18 billion
  • AWS net sales $20.5 billion, +27% y/y, missing estimate $21.0 billion
  • North America net sales $78.84 billion, +20% y/y, beating estimate $76.95 billion
  • International net sales $27.72 billion, -4.9% y/y, missing estimate $29.28 billion
• Third-party seller services net sales excluding F/X +23% vs. +18% y/y, beating estimate +18.7%
• Subscription services net sales excluding F/X +14% vs. +23% y/y, estimate +20% (2 estimates)
• Amazon Web Services net sales excluding F/X +27% vs. +39% y/y, estimate +31.9%
• Operating income $2.53 billion, -48% y/y, missing estimate $3.11 billion
• Operating margin 2% vs. 4.4% y/y, missing estimate 2.48%
• Intl oper margin -8.9% vs. -3.1% y/y, missing estimate -7.71%
• Fulfillment expense $20.58 billion, +11% y/y, below the estimate $21.58 billion

But while revenue was disappointing and AWS was subpar at best, the reason why AMZN stock is imploding after hours is because the company’s guidance was absolutely catastrophic

• Sees net sales $140.0 billion to $148.0 billion, the midline coming far below the median estimate of $155.52 billion
• Sees operating income to be between $0 and $4 billion, also missing the median estimate of $4.66BN

In short: ugly earnings, catastrophic guidance!

Digging into the numbers we find that operating margins tumbled to 2.0%, down from 4.0% and missing the estimate of 2.5%. In fact as shown below, the only reason this number wasn’t positive is thanks to AWS.

And while the market was not happy with the overall profit margin, it was even less enthused with the profit margin breakdown where despite a modest improvement in AWS, the international operating margin collapsed to the lowest in the past decade, with US online sales still unable to turn green. In fact, if it wasn’t for AWS, AMZN would have negative operating income.

The chart above shows that Amazon’s online retail business in North America and international both lost money. This is after hiking the cost of Amazon Prime $20 a year and adding fees to online merchants that sell on the platform. If Amazon Web Services is subsidizing the e-commerce side, it makes it harder to justify keeping the businesses together.

And while AWS did post a modest improvement in profit margins, where it did disappoint was in revenue growth, which rose 27% Y/Y to $20.54 billion, missing the estimate of $21.01 billion.

But all these disappointing data points aside, what markets are mostly focused on is that forecast revenue growth in a range of $140-$148BN (midline at $144BN) suggests that very soon the company may see an unheard of event: shrinking revenues!

As Bloomberg puts it, the results will ramp up pressure for CEO Andy Jassy – and all the other tech giants – to further cut costs. Amazon has a hiring freeze in its retail team and has been cutting experimental projects. But investors will be hungry for deeper cuts if sales are falling flat.

And speaking of Bloomberg, BBG Intel’s Poonam Goyal was rather adamant “It’s actually pretty bad across the board. It’s hard to find something good in this press release….It’s kind of humming the same tune of results we saw earlier. The consumer is slowing.”

In light of these catastrophic earnings and terrible guidance, it is not surprising that the kneejerk reaction may have been the worst in post-earnings plunge Amazon history: the stock was down as much as 21% after hours, plunging to the lowest level since the March 2020 covid crash when the entire economy was locked down!

Not surprisingly, Wayfair and EBay shares are falling postmarket after Amazon’s forecast miss. Wayfair is down as much as 6.2% while EBay declines as much as 3.6%. Alibaba is down 1.7%.

The ECB hiked rates by 75bps as expected but the somewhat dovish language sent Bund yields (-25bps) and EUR lower on the day. 10Y Bund yields tumbled back below 2.00%…

Source: Bloomberg

EUR back below parity against the dollar…

Source: Bloomberg

US stocks gained some ground on the ECB but tumbled on the US cash open, then ripped back after another Democrat demanded Powell stop hiking rates (but not for political reasons of course).

That rally last about 45 minutes, and then… (amid Putin’s address), the nuke threats started from Washington:

• *AUSTIN DESCRIBES RUSSIA AS ‘ACUTE’ THREAT TO US VALUES, WON’T RULE OUT NUCLEAR USE AGAINST NON-NUCLEAR THREATS,  DEFENSE STRATEGY SHUNS LIMITS ON USE ONCE EMBRACED BY BIDEN

And stocks sank. Nasdaq was monkeyhammered 2% lower and along with the S&P closed red. The Dow was the only major to manage gains, helped by CAT (which added over 100pts alone)…

Shorts were squeezed again at the open, but – again – that didn’t last…

Source: Bloomberg

But call demand continues to dominate put demand as there is no fear…

Source: Bloomberg

Notably, VIX was flat to down today despite the S&P being down… once again as we suspect puts were covered (pressuring vol lower)…

Source: Bloomberg

META was clubbed like a baby seal (-24% – its second worst day ever), tumbling to 6 year lows, down 75% from the highs (with Zuck down over $100bn in net worth since the highs!!)…

Source: Bloomberg

The market cap of the FANG stocks is back below pre-COVID highs…

Source: Bloomberg

Just for some context, the impact of GOOGL, MSFT, and META (among others) has prompted the biggest 2 day outperformance of the equal-weighted Nasdaq over the cap-weighted Nasdaq since Nov 2012…

Source: Bloomberg

As month-end spookily looms on Monday, the spread in US Majors is massive (Nasdaq +2% but The Dow +12% MTD)…

Source: Bloomberg

Most notably today we saw rate-trajectory expectations dovishly dive (GDP Price indices fell a little?) with terminal rate dropping and rate-cut hopes rising.Note that the Fed terminal rate (in May 2023) is down from 5.03% last Friday to 4.78% at its lows today…

Source: Bloomberg

That helped send UST yields dramatically lower with 5Y outperforming (-8bps) and 30Y the relative weakest. However, from the day’s highs, the swing in yields was huge 15-20bps across the curve. The main buying pressure in TSYs was from the GDP data to the European close…

Source: Bloomberg

10Y Yields dropped back below 4.00%…

Source: Bloomberg

The BoJ is set to announce tonight… will they comment on the fact that their YCC has broken?

Source: Bloomberg

The dollar rebounded modestly after 2 ugly days…

Source: Bloomberg

Bitcoin drifted lower today after 2 days higher…

Source: Bloomberg

Gold also drifted lower today

With the easing of rate expectations, and despite the ugly durable goods data (perhaps offset by US GDP), oil prices rallied today with WTI back abive $89.50…

US NatGas, on the other hand, was smashed lower (back below $6)…

Finally, is it over yet?

Source: Bloomberg

Maybe… but Nasdaq never made it back to those levels for years.

Authored by Steve Watson via Summit News,

Hundreds of woke Twitter employees have deserted the company and gone to work for Google and Meta over the past few months in anticipation of Elon Musk taking over the company, according to a Business Insider report.

The piece notes that in the past three months, a total of 530 Twitter employees have left, with many running directly to the tech giant’s direct competitors.

Over 1,100 employees have left Twitter since Musk announced his intention to buy the company back in January, with almost a third going to Google or Meta.

The figures come from a new analysis of LinkedIn data, with the report noting that other workers have moved to the likes of Pinterest, LinkedIn, Snap, and TikTok.

Musk, who has vowed to complete the Twitter acquisition by Friday, has said he intends to make huge staff cuts of up to 75% anyway, cutting worker numbers from around 7,500 to around 2,000 employees.

The Washington Post also notes that even if Musk doesn’t close the deal, Twitter officials have planned a $800 million cut in payroll by the end of 2023 regardless.

Musk previously mocked work-from-home enthusiasts at Apple with a lazy dog meme, and also stated that constantly working remotely is “phoning it in,” informing employees they can collect their belongings if they disagree.

pic.twitter.com/qup2NUiOM1

— Elon Musk (@elonmusk) May 18, 2022

In an email to Tesla employees earlier this year, Musk wrote “Remote work is no longer acceptable,” except in extreme cases.

“Anyone who wishes to do remote work must be in the office for a minimum (and I mean *minimum*) of 40 hours per week or depart Tesla,” he wrote in correspondence then leaked by Tesla shareholder Sam Nissim.

#Tesla no longer allowing remote work@TeslaPodcast @SawyerMerritt @WholeMarsBlog @garyblack00 @GerberKawasaki pic.twitter.com/DKAgh9ptSX

— Sam Nissim (@SamNissim) June 1, 2022

Musk confirmed that the email was authentic and doubled down, saying anyone unhappy with it should “pretend to work somewhere else”:

hey elon a lot of people are talking about this leaked email, any additional comment to people who think coming into work is an antiquated concept? https://t.co/E3qSBVrJIJ

— Whole Mars Catalog (@WholeMarsBlog) June 1, 2022

Musk has promised that “work ethic expectations” at Twitter will be “extreme” when he takes over:

Also, work ethic expectations would be extreme, but much less than I demand of myself

— Elon Musk (@elonmusk) May 7, 2022

Yesterday, Musk was filmed entering Twitter HQ literally carrying a sink. He tweeted the footage with the caption “let that sink in,” clearly an effort to trigger his detractors:

Entering Twitter HQ – let that sink in! pic.twitter.com/D68z4K2wq7

— Elon Musk (@elonmusk) October 26, 2022

The post prompted a barrage of memes imagining the reaction of remaining woke Twitter employees:

Meanwhile, as Twitter stock is rising, Meta is collapsing:

Update(1534ET): Putin in his nearly four-hour long annual Valdai Discussion Club speech (which included a the lengthy Q&A portion) “appeared relaxed”, Reuters observed while at times questioned by journalists and panelists about the prospect of nuclear war. 

Importantly, he rejected head-on the allegations from the West that he ever so much as hinted at plans to deploy nukes in Ukraine, describing a nuclear strike in the context of the “special operation” to be ultimately pointless. “We see no need for that,” Putin said. “There is no point in that, neither political, nor military.” He underscored, “it doesn’t make sense for us to do it.

He went on to emphasize that Russia had “never said anything proactively about the possible use of nuclear weapons by Russia.” At the same time he lashed out at Washington, for being the “only country in the world that has used nuclear weapons against a non-nuclear state” – in reference to WWII and the bombs over Hiroshima and Nagasaki.

He specifically referenced prior statements of Liz Truss and vague references to his saying he’s willing to defend Russia “by all means available” as having been intentionally misinterpreted and distorted: 

Putin said an earlier warning of his readiness to use “all means available to protect Russia” didn’t amount to nuclear saber-rattling but was merely a response to Western statements about their possible use of nuclear weapons.

He particularly mentioned Liz Truss saying in August that she would be ready to use nuclear weapons if she became Britain’s prime minister, a remark which he said worried the Kremlin.

“What were we supposed to think?” Putin said. “We saw that as a coordinated position, an attempt to blackmail us.”

Literally as Putin was speaking, the Pentagon decided it was a good time to unveil a stunning nuclear strategy reversal, saying it would no longer rule out use of nuclear weapons against a non-nuclear threat.

As we detailed earlier, the Defense Department said in the long-awaited document issued Thursday that “By the 2030s the United States will, for the first time in its history face two major nuclear powers as strategic competitors and potential adversaries”. In response, the US will “maintain a very high bar for nuclear employment” without ruling out using the weapons in retaliation to a non-nuclear strategic threat to the homeland, US forces abroad or allies.

In the document, which was framed well before the invasion, the Pentagon says Russia continues to “brandish its nuclear weapons in support of its revisionist security policy” while its modern arsenal is expected to grow further. 

Of course, Putin is now essentially pointing the finger at Washington and its allies for being the real nuclear threat in the world. The DoD briefing certainly didn’t hurt his case, at least from the point of view of Moscow and its allies. 

* * *

“Russia is not challenging the western elite. We are not trying to become the hegemon,” Russian President Vladimir Putin said early in an important speech before the Valdai Discussion Club meeting outside Moscow on Thursday. Each year the Valdai speech is a major one and closely watched by Western officials and media.

This year it was touted with the eye-catching title of “A Post-Hegemonic World: Justice and Security for Everyone.” And of course, this year’s Valdai meeting comes against the backdrop of the biggest war Europe has seen on its eastern doorstep since WWII. 

Putin said in his remarks that Russia merely wants to “defend its right to exist” and “won’t let itself be destroyed and wiped off the geopolitical map.” This as nuclear rhetoric and threats of defending red lines between Moscow and the West have reached heights not seen since the Cold War. 

He repeated a familiar refrain of a crisis unfolding because the Western allies are using Ukraine for their “dirty game” in an ultimate drive for world domination. “Power over the world is what the West has put at stake in the game it plays. This game is certainly dangerous, bloody and I would call it dirty,” he said according to a state media translation. 

“But in the modern world, sitting aside is hardly an option. He who sows the wind will reap the whirlwind, as the proverb says,” he added. Repeating a well-known theme of his, juxtapositioning collapsing unipolar order vs. multipolarity, he said “new centers of power in the multipolar world and the West will have to start talking as equals about our common future.”

“[This game] denies the sovereignty of nations and peoples, their identity and uniqueness, and has no regard whatsoever for other countries,” Putin added.

Commenting on one segment of the talk, The New York Times said the Valdai speech sought to appeal to conservatives in Europe and the US: 

Mr. Putin insisted that Russia did not fundamentally see itself as an “enemy of the West.” Rather, he said — as he has before — that it was “Western elites” that he was fighting, ones who were trying to impose their “pretty strange” values on everyone else.

“There are at least two Wests,” Mr. Putin said in his speech at the plenary session in Moscow of an annual foreign policy conference. One, he said, was the West of “traditional, mainly Christian values,” which Russia was close to.

But Putin drove home in contrast that “There’s another West — aggressive, cosmopolitan, neocolonial, acting as the weapon of the neoliberal elite.”

Ukrainian officials have been watching the speech closely, and commenting: 

“Confidence in one’s infallibility is a very dangerous state, one step away from destroying those they don’t like” – Putin knows what he is talking about at Valdai. pic.twitter.com/0VRSjKlWiu

— Maria Avdeeva (@maria_avdv) October 27, 2022

And more specifically on the Ukraine conflict, the Russian leader charged of the West’s actions, “They’re always trying to escalate…They’re fueling the war in Ukraine, organizing provocations around Taiwan, destabilizing the world food and energy markets.” 

And more via state media translation:

Putin warned that the West’s confidence in its “infallibility” is a “very dangerous” condition, with there only being “one step” between this self-confidence to the idea that “they can simply destroy those they do not like, or as they say, to ‘cancel’ them.”

Emphasizing that Russia is not a natural “enemy” of the West, Putin urged Western political elites to stop seeing “the hand of the Kremlin” behind all their internal problems.

On multipolarity, Putin’s message to Europe is essentially “take it or leave it”…

Putin is at it again. New Munich III speech at Valdai conference. He is laying the foundations of new multipolar world order. The message to Europe is “take it or leave it”. pic.twitter.com/oUixDO7Jmm

— србин (@forzaserbia) October 27, 2022

Western officials are also keeping a close watch on Putin’s words regarding nuclear doctrine and usage. Putin at Valdai underscored he sees “no political or military reason” to conduct a nuke strike in Ukraine. He also stressed Moscow’s nuclear doctrine is defensive in nature. “Russia has never talked about nuclear use, only replied,” he said. 

He went on to warn that it remains Russia will never “put up with what the West tells it to do” – and that while Russia should not be seen as a direct challenge to the West, it reserves the right to develop. With this theme established, Putin asserted that Washington has discredited international finance “by using the dollar as a weapon” – thus he posited that in the future continued moves toward “settlements in national currencies will dominate.”

Authored by Simon White, Bloomberg macro strategist,

The real decline in stocks has yet to come, as inflation and recession threaten the historic overweight in equities versus bonds.

It has been a torrid year for financial assets. The paradigm shift in inflation has led to decades of market experience being turned on its head, with stocks and bonds commonly falling together. This year has seen a peak-to-trough drawdown of over 25% in the S&P, and an historic 15% drop in Treasuries.

The stock-bond ratio has declined precipitously, but we are likely just getting started.

The ratio tends to revert to its mean, but with big overshoots.

Those to the upside typically lead to overshoots to the downside of a similar magnitude. The enormous fiscal and monetary injections during the pandemic led to a dizzying bubble in financial assets, sending the stock-bond ratio skyward.

But the fall in stocks and bonds this year has only taken the ratio to just below its mean.

We are in the process of an overshoot that could take it much lower still, driven by the twin specters of inflation and recession.

It’s a common misconception that equities are an inflation hedge. Some stocks and sectors, particularly those related to real assets, do make good inflation hedges, but equities overall are terrible at protecting against persistent price rises.

In fact, equities were the worst-performing main asset class in both real and nominal terms during the Great Inflation of the 1970s. This is because they became a shunned asset.

Why?

Stocks have an infinite duration with a fixed coupon, the return on equity. Bonds, on the other hand, have a maturity date where there is an opportunity to renegotiate the coupon.

When inflation is high, equities have to compete with bonds and they begin to look less and less attractive. Today, the real dividend yield of the S&P is -5.6% and the real earnings yield is -7.2%, while the real 10-year yield on a Treasury bond is -3.5%. Why bother with equities when you can get a comparatively juicy, less risky return from bonds?

The big overweight in stocks versus bonds is therefore at great risk. The prospect of higher returns has meant a strong preference for stocks over bonds is the norm in the US. That overweight currently sits at its highest level since the tech bubble of 2000, after hitting even greater extremes during the pandemic.

As it becomes apparent inflation is entrenched and not returning to a low-and-stable regime any time soon, the penny will drop that equities are more of a leaky ship than a water-tight revenue generator, prompting an exodus to comparatively inflation-resilient bonds.

This exodus could be sizable, taking the stock-bond ratio considerably lower and decimating the long-term real return of equities. The 1970s saw a similar rebalancing, with the equity overweight in the late 1960s morphing into a record underweight that persisted until the late 1980s. Inflation, like a skin disease, gave equities a rash that made them unattractive for many years. They face the same risk today.

A recession only makes the risk of further stock underperformance more immediate. Leading indicators point to a US recession in the next 3-6 months as being all but inevitable. Stocks face more downside in a downturn, while bonds are likely to catch their usual haven bid. History shows that the stock-bond ratio falls at a median of over 12% in the six months after a recession begins. Leaving aside that in real terms both assets are still likely to lose you money, the stock-bond ratio is poised to fall further in any economic slump.

Ultimately, though, stocks are more at risk than bonds as governments do not borrow in equity markets.

High inflation means yields could rise much higher, and at this point equities would be sacrificed to limit how much governments have to pay to borrow by way of financial repression. This, later on, may mark the final capitulation in the stock-bond ratio.

The long-term outlook for bonds is less than rosy in the current inflation paradigm, but the prospect for stocks is dimmer still.

A former Trump administration official and two Republican lawmakers are demanding an immediate investigation from the Department of Health and Human Services (HHS) over an advocacy group’s use of $8.5 million taxpayer dollars.

As Rita Li reports via The Epoch Times, Alianza Americas, a pro-mass immigration group funded by liberal billionaire George Soros, may have unlawfully used funds granted by agencies under HHS, according to Friday letters by Brian Harrison, the former chief of staff of the department, Reps. Chip Roy (R-Texas) and Beth Van Duyne (R-Texas). Federal grants are banned under U.S. law from being leveraged to weigh on government positions on legislation or policies, including lobbying.

“Despite statutory and regulatory restrictions on lobbying for recipients of federal funding from all federal agencies, forms submitted to the Internal Revenue Service by Alianza Americas appear to show activity in direct violation of the law and federal regulations,” Roy and Van Duyne wrote in an Oct. 21 joint letter sent to HHS Deputy Inspector General Christi Grimm, calling for “a review of all grants received by Alianza Americas as well as the publicly disclosed actions” taken by the group.

Besides calling to defund U.S. Customs and Border Protection, Alianza Americas launched in September a lawsuit against Florida Gov. Ron DeSantis after the state flew illegal immigrants to Martha’s Vineyard, Massachusetts under the governor’s order.

Official records show Soros’s Open Society Foundations website awarded nearly $1.4 million to Alianza Americas between 2016 and 2020.

Yet lawmakers said official grants from the Centers for Disease Control and Prevention (CDC) and the Health Resources and Services Administration (HRSA) totals $8.5 million over the past two years.

CDC granted Alianza in February 2021 $7.5 million in funding, which will terminate in September 2025, “to reduce the spread of COVID-19 and mitigate impacts among Latinx and Latin American immigrants.”

Since last July, the group had also received a total of $1 million from HRSA to “increase COVID-19 vaccine access” among local communities.

Van Duyne asserted that unchecked spending under President Joe Biden is “out of control.”

“I have continued to monitor actions taken by the Department,” Harrison wrote in his letter to HHS, saying he is “deeply concerned” that taxpayer dollars may have encouraged illegal immigration to the United States, both at home and in foreign jurisdictions, the Washington Examiner reported.

Read the rest here…

Authored by Jesse Felder via TheFelderReport.com,

“This month (so far) has been the worst for the Nasdaq since the stock market was in the throes of the Great Financial Crisis back in 2008. And it shouldn’t be hard to understand what is plaguing the Big Tech stocks that make up the bulk of this index. In addition to capital flows, macro economic trends, risk appetites and insider activity, all of which warned of the current weakness in stock prices well ahead of time, there are two major bearish forces at work.”

I wrote that six months ago and, if you change “month” in the first sentence to “year,” it is just as true today as it was back then.

Put the market caps together of Microsoft, Apple, Nvidia, Tesla and Amazon and compare that figure with their aggregate free cash flow and you get a multiple of over 50 times, down from nearly 70 at the start of the year.

This historic level of overvaluation was only made possible by massive money printing on the part of the Fed that supported both cash flows and the multiple applied to them.

Now that inflation is raging, however, the money printer has been shifted into reverse and that’s already having a visible impact (both “bearish forces,” the reversion in valuations and falling liquidity, have been consolidated into one chart this time below).

Furthermore, if the Fed follows through on its commitment to normalize the balance sheet over the next few years then this reversion in valuations has only just begun.

In fact, price-to-free cash flow ratios could still halve from their current levels. Of course, if free cash flow (the denominator in the valuation ratio) continues to grow as it has over the past decade, this process will be much less painful than if free cash flow also goes into reverse.

Worryingly, that reversal in cash flows is actually what has happened over the past year in which growth went from double digits positive to double digits negative.

As I wrote in the prior piece, “Considering the nature of the pandemic and the stimulus enacted as a result, it’s not unreasonable to think there was a significant pulling forward of demand for Big Tech products and services that will now leave a vacuum of demand for a prolonged period of time.”

We’re just now beginning to find out how much of a vacuum of demand now lies in front of us. And a Fed-induced recession resulting from the rapid rise in interest rates and draining of liquidity isn’t likely to improve things in that regard.

Well, we’re finally there: stocks are officially trading off nuclear war headlines.

Moments ago, as part of his closely-watched speech, Vladimir Putin appeared to talk down the likelihood of a nuclear attack in Ukraine:

• *PUTIN: NO POLITICAL, MILITARY REASON IN NUKE STRIKE IN UKRAINE

Which, however, is more than can be said about the US.

As Bloomberg just reported, the Pentagon’s new National Defense Strategy rejects limits on using nuclear weapons long championed by arms control advocates (and, in the not too distant past, by Joe Bide) citing burgeoning threats from Russia and China.

“By the 2030s the United States will, for the first time in its history face two major nuclear powers as strategic competitors and potential adversaries,” the Defense Department said in the long-awaited document issued Thursday. In response, the US will “maintain a very high bar for nuclear employment” without ruling out using the weapons in retaliation to a non-nuclear strategic threat to the homeland, US forces abroad or allies.

In yet another stark reversal for the senile occupant of the White House basement, in his 2020 presidential campaign Biden had pledged to declare that the US nuclear arsenal should be used only to deter or retaliate against a nuclear attack, a position blessed by progressive Democrats and reviled by defense hawks. But, like with every other position held by the pathological liar who even trumps Trump in the untruth department, this one has just been reversed as well as “the threat environment has changed dramatically since then” and the Pentagon strategy was forged in cooperation with the flip-flopping White House.

In a stunning move that should – or rather “should” – spark outrage among the so-called progressives but will at best prompt some very sternly retracted letters, the nuclear report that’s part of the broader strategy said the Biden administration reviewed its nuclear policy and concluded that “No First Use” and “Sole Purpose” policies “would result in an unacceptable level of risk in light of the range of non-nuclear capabilities being developed and fielded by competitors that could inflict strategic-level damage” to the US and allies.

meanwhile…

Putin: The only country in the world that has used nuclear weapons against a non-nuclear state is the United States of America

— Paul Sonne (@PaulSonne) October 27, 2022

The nuclear strategy document doesn’t spell out what non-nuclear threats could produce a US nuclear response, but current threats include hypersonic weapons possessed by Russia and China for which the US doesn’t yet have a proven defense.

It does spell out, however, in the strongest terms, what would happen to another nuclear power, North Korea, if it launched a nuclear attack on the US, South Korea or Japan. That action “will result in the end of that regime,” it says. US nuclear weapons continue to play a role in deterring North Korean attacks.

So, the brilliant neocon minds behind the report concluded, it is better to instill the fear of a disproportionate nuclear retaliation, thus making an outright nuclear attack far more likely (if the US will nuke you anyway, may as well go all out).

In the document, which was framed well before the invasion, the Pentagon says Russia continues to “brandish its nuclear weapons in support of its revisionist security policy” while its modern arsenal is expected to grow further. In other words, the Pentagon knew what Putin would do even before he did it and that defined the dramatic revision in US nuclear posture. Almost as if the Pentagon directed the entire sequence of events…

Meanwhile, China remains the US’s “most consequential strategic competitor for coming decades,” Defense Secretary Lloyd Austin said in a letter presenting the new defense strategy. He cited China’s “increasingly coercive actions to reshape the Indo-Pacific region and the international system to fit its authoritarian preferences,” even as it rapidly modernizes and expands its military. China wants to have at least 1,000 deliverable nuclear warheads by the end of the decade, the nuclear strategy document says, saying it could use them for “coercive purposes, including military provocations against US allies and partners in the region.”

The nuclear strategy affirmed modernization programs including the ongoing replacement of the aging US air-sea-land nuclear triad. Among them are the Navy’s Columbia-class nuclear ICBM submarine, the ground-based Minuteman III ICBM replacement, the new air-launched Long-Range Standoff Weapon and F-35 fighter jets for Europe carrying nuclear weapons.

The review confirmed previous reports that the Pentagon will retire the B83-1 gravity bomb and cancel the Sea-Launched Cruise Missile program. But the review endorses a controversial Trump-era naval weapon, the low-yield W76-2 submarine-launched nuclear warhead, which is described as providing “an important means to deter limited nuclear use.”

The broader strategy report also offered gently worded criticism of major US weapons programs, which often runs years behind plans and billions of dollars over initial budgets.

“Our current system is too slow and too focused on acquiring systems not designed to address the most critical challenges we now face,” the Pentagon said. It called for more “open systems that can rapidly incorporate cutting-edge technology” while reducing problems of “obsolescence” and high costs.

The Pentagon strategy documents were sent to Congress in classified form in March so they were considered during congressional approval of the fiscal 2023 defense budget.

* * *

So how to trade all of this? Well, the initial instinct now that nuclear war headlines are being lobbed around is that it may be time to sell… but as Art Cashin so insightfully put it some time ago, “Never bet on the end of the world, because it only happens once.”

Now thanks to the Biden admin, that “once in a lifetime” event is that much closer to taking place.

“Russia is not challenging the western elite. We are not trying to become the hegemon,” Russian President Vladimir Putin said early in an important speech before the Valdai Discussion Club meeting outside Moscow on Thursday. Each year the Valdai speech is a major one and closely watched by Western officials and media.

This year it was touted with the eye-catching title of “A Post-Hegemonic World: Justice and Security for Everyone.” And of course, this year’s Valdai meeting comes against the backdrop of the biggest war Europe has seen on its eastern doorstep since WWII. 

Putin said in his remarks that Russia merely wants to “defend its right to exist” and “won’t let itself be destroyed and wiped off the geopolitical map.” This as nuclear rhetoric and threats of defending red lines between Moscow and the West have reached heights not seen since the Cold War. 

He repeated a familiar refrain of a crisis unfolding because the Western allies are using Ukraine for their “dirty game” in an ultimate drive for world domination. “Power over the world is what the West has put at stake in the game it plays. This game is certainly dangerous, bloody and I would call it dirty,” he said according to a state media translation. 

“But in the modern world, sitting aside is hardly an option. He who sows the wind will reap the whirlwind, as the proverb says,” he added. Repeating a well-known theme of his, juxtapositioning collapsing unipolar order vs. multipolarity, he said “new centers of power in the multipolar world and the West will have to start talking as equals about our common future.”

“[This game] denies the sovereignty of nations and peoples, their identity and uniqueness, and has no regard whatsoever for other countries,” Putin added.

Commenting on one segment of the talk, The New York Times said the Valdai speech sought to appeal to conservatives in Europe and the US: 

Mr. Putin insisted that Russia did not fundamentally see itself as an “enemy of the West.” Rather, he said — as he has before — that it was “Western elites” that he was fighting, ones who were trying to impose their “pretty strange” values on everyone else.

“There are at least two Wests,” Mr. Putin said in his speech at the plenary session in Moscow of an annual foreign policy conference. One, he said, was the West of “traditional, mainly Christian values,” which Russia was close to.

But Putin drove home in contrast that “There’s another West — aggressive, cosmopolitan, neocolonial, acting as the weapon of the neoliberal elite.”

Ukrainian officials have been watching the speech closely, and commenting: 

“Confidence in one’s infallibility is a very dangerous state, one step away from destroying those they don’t like” – Putin knows what he is talking about at Valdai. pic.twitter.com/0VRSjKlWiu

— Maria Avdeeva (@maria_avdv) October 27, 2022

And more specifically on the Ukraine conflict, the Russian leader charged of the West’s actions, “They’re always trying to escalate…They’re fueling the war in Ukraine, organizing provocations around Taiwan, destabilizing the world food and energy markets.” 

And more via state media translation:

Putin warned that the West’s confidence in its “infallibility” is a “very dangerous” condition, with there only being “one step” between this self-confidence to the idea that “they can simply destroy those they do not like, or as they say, to ‘cancel’ them.”

Emphasizing that Russia is not a natural “enemy” of the West, Putin urged Western political elites to stop seeing “the hand of the Kremlin” behind all their internal problems.

On multipolarity, Putin’s message to Europe is essentially “take it or leave it”…

Putin is at it again. New Munich III speech at Valdai conference. He is laying the foundations of new multipolar world order. The message to Europe is “take it or leave it”. pic.twitter.com/oUixDO7Jmm

— србин (@forzaserbia) October 27, 2022

Western officials are also keeping a close watch on Putin’s words regarding nuclear doctrine and usage. Putin at Valdai underscored he sees “no political or military reason” to conduct a nuke strike in Ukraine. He also stressed Moscow’s nuclear doctrine is defensive in nature. “Russia has never talked about nuclear use, only replied,” he said. 

He went on to warn that it remains Russia will never “put up with what the West tells it to do” – and that while Russia should not be seen as a direct challenge to the West, it reserves the right to develop. With this theme established, Putin asserted that Washington has discredited international finance “by using the dollar as a weapon” – thus he posited that in the future continued moves toward “settlements in national currencies will dominate.”

Authored by Joanna Marsh via FreightWaves.com,

Roughly 61% of Brotherhood of Railroad Signalmen’s voting members oppose deal intended to head off strike…

Count the Brotherhood of Railroad Signalmen (BRS) as another union to reject the tentative labor agreement that representatives of the rail unions and the freight railroads negotiated under pressure from the White House.

The union and the organization representing the railroads plan to return to the negotiating table, but BRS’ vote further clouds the question of whether a freight rail strike could occur — something that the tentative agreement had sought to stave off. Members of the Brotherhood of Maintenance of Way Employes Division rejected that union’s tentative agreement earlier this month.

BRS announced Wednesday that 60.57% of voting members opposed ratification, while 39.23% voted in favor. 

BRS represents more than 6,000 members affected by the negotiations, which is about 5% of the 115,000 union members involved in the negotiations process.

BRS President Michael Baldwin said the percentage of members who voted — 73.18%  — was the highest participation rate in BRS history.

The union was represented at the negotiating table by the Coordinated Bargaining Coalition and later by the United Rail Unions. The National Carriers Conference Committee (NCCC) represented the freight railroads.

In response to BRS’ vote, NCCC said it was “disappointed” in the outcome, saying that the failure to ratify the agreement would delay the benefits of the tentative agreement for BRS members.

Both NCCC and BRS have agreed to maintain the status quo until early December, which means any potential service disruptions by BRS members would not occur before then. Both parties will be going back to the bargaining table for further contract negotiations.

NCCC says the tentative agreement includes recommendations by the Presidential Emergency Board (PEB), a three-person independent group appointed by President Joe Biden over the summer to work with the railroads and the unions on finding ways to resolve the labor contract impasse and avert a strike. The railroads and unions have been negotiating a new contract since January 2020.

Those recommendations included the largest wage increase in nearly five decades, maintained rail employees’ platinum-level health benefits and added an extra day of paid time off, NCCC said, noting that six other unions had already voted in favor of ratifying their labor agreements. 

NCCC said PEB’s recommendations “represent a carefully considered compromise of all parties’ interests.”

“BRS asserts that the tentative agreement is inadequate because it does not provide for additional paid sick time. However, the vast majority of BRS members work predictable schedules and all have access to time off,” NCCC said. “Like other rail employees, they can and do take time off for sickness and already have paid sickness benefits beginning after four days of illness-related absence and extending for up to a year.

“The structure of these benefits is a function of decades of bargaining where the unions have repeatedly agreed that short-term absences would be unpaid in favor of higher compensation for days worked and more generous sickness benefits for longer absences,” NCCC continued. “The three experienced arbitrators appointed to PEB 250 by President Biden thoroughly reviewed and rejected a union proposal to add paid sick time for short-term absences to the existing system, noting in their report that union concerns had been considered in formulating the PEB’s historic wage recommendation.”

But BRS said the vote “spoke loudly and clearly that their contributions are worth more.”

“I have expressed my disappointment throughout the process in the lack of good-faith bargaining on the part of the NCCC, as well as the part PEB 250 played in denying BRS members the basic right of paid time off for illness,” Baldwin said in a statement. “The NCCC and PEB also both failed to recognize the safety-sensitive and highly stressful job BRS members perform each day to keep the railroad running and supply chain flowing. 

“Without Signalmen, the roadways and railroad crossings would be unsafe for the traveling public, and they shoulder that heavy burden each day. Additionally, the highest offices at each Carrier, as well as their stockholders, seem to forget that the rank-and-file of their employees continued to perform their job each day through an unprecedented pandemic, while the executives worked from home to keep their families safe.”

The six unions that have approved their agreements are the American Train Dispatchers Association, the International Brotherhood of Electrical Workers, the Transportation Communications Union, the Brotherhood of Railway Carmen, the National Conference of Firemen & Oilers, and the mechanical and engineering division of the International Association of Sheet Metal, Air, Rail and Transportation (SMART) Workers.

Two of the largest unions representing train engineers and conductors — the Brotherhood of Locomotive Engineers and Trainmen and SMART-Transportation Division — have yet to vote on whether to ratify their agreements.